Issue Report: Phasing out fossil fuel subsidies

Should government phase out all subsidies for fossil fuel development?

For many decades, developed and developing countries alike have subsidized fossil fuels as a means of ensuring that these sources of energy – central to economic development over the past century – can remain relatively inexpensive. Yet, as it has become clear that fossil fuels will continue to deplete over the next decades and century, that renewable energy sources of different kinds will become the replacement fuel of choice, and as the desire for cleaner sources of fuel has grown with concerns over climate change, many have pressed to end or phase out fossil fuel subsidies. It is becoming increasingly common for high profile national and international leaders to call for ending fossil fuel subsidies, and to introduce legislation to this effect. Of particular note, US President Barack Obama demanded in his January 2011 State of the Union address that the United States Congress end fossil fuel subsidies: “I’m asking Congress to eliminate the billions in taxpayer dollars we currently give to oil companies. So instead of subsidizing yesterday’s energy, let’s invest in tomorrow’s.”[1] But proponents of fossil fuel subsidies claim that modern economies are still too dependent on fossil fuels to eliminate subsidies all together, and contend that doing so would raise prices and harm the poor. These and other pros and cons are considered below.

Environment: Is ending fossil fuel subsidies good for the environment?

Fossil fuel subsidies contradict fight against climate change.

"Money for nothing, and your climate for free." Oil Change International. September 16th, 2011

“The principle is simple and clear: You can’t really say you’re committed to the fight against climate change if you’re still funding oil and coal. If you’re in a hole, stop digging.”

US Treasury Secretary Timothy Geithner has also said that fossil fuel subsidies “conflict” with the Obama administration goal of combating climate change.

Ending fossil fuel subsidies would cut emissions.

International Energy Agency (IEA), the G-20 said that “eliminating fossil fuel subsidies by 2020 would reduce greenhouse gas emissions in 2050 by ten percent.”

Money subsidizing oil could go toward subsidizing clean energy.

US President Barack Obama: “We need to get behind this [clean tech] innovation. And to help pay for it, I’m asking Congress to eliminate the billions in taxpayer dollars we currently give to oil companies. I don’t know if you’ve noticed, but they’re doing just fine on their own. So instead of subsidizing yesterday’s energy, let’s invest in tomorrow’s.”

Ending oil subsidies is good for air quality, human health.

“The president got it right [in his 2011 state of the Union where he called for ending fossil fuel subsidies],” said Frances Beinecke, president of the Natural Resources Defense Council, in a statement. “The president stood up for the health of the American people over the special interests of big polluters who want to choke our air with endless clouds of life-threatening pollution.”

If no cap-and-trade, ending fossil fuels is close second.

"Money for nothing, and your climate for free." Oil Change International. September 16th, 2011

“It’s so obvious, you can’t really believe it hasn’t happened sooner. With all the hoopla about cap and trade, carbon offsets, and parts per million, wouldn’t a good place to start be to stop supporting big oil and dirty coal with our tax dollars?”

Oil subsidies essential until clean tech becomes viable alternative.

"Should oil subsidies be eliminated in the US?" "No" essay on Helium

“Oil subsidies, while certainly not something that should be maintained in the long term, are essential to the US Economy until a viable, economical and environmentally sound alternative presents itself. […] A subsidy should generally, unless situations do not allow it, be temporary. Such is the case with oil. As economical alternatives (ethanol is not a good example as it require BIGGER subsidies than oil) become available, the subsidies on oil can be eased as less of the US economy relies on it. Eliminating the subsidies is a very long term goal, perhaps gradually lessening them can increase the speed that alternatives can be found. Until those alternatives come into existence however, the subsidies must remain, for the economic well being of America’s already hurting economy.”

Some "fossil fuels" are worth subsidizing for environment.

Not all fossil fuels are the same. Some are more polluting than others. Natural gas is one of the least polluting fuels, for example. Many people consider it to be a environmentally-friendly energy superstar for the 21st century. Therefore, subsidizing natural gas (a fossil fuel) can help reduce emissions and foster a cleaner environment.

Level playing field: Are subsidies unfair to clean energy?

Ending oil subsidies levels playing field for clean energy

Supporters of oil subsidies contend that oil subsidies are necessary because clean energy is not yet viable and the economy remains dependent on oil. Yet, it is precisely these subsidies that make it impossible for renewable energy to compete and perpetuate the dependence on oil. Subsidies are, therefore, a self-fulfilling-prophecy in this regard.

Subsidizing clean energy and not oil will allow rapid transition.

Ideally, renewables, the necessary fuel of the future, should be subsidized, and fossil fuels should not be. In this situation, the transition to renewables can be made much faster, thus more quickly eliminating the oil-dependencies that are currently used to justified oil subsidies.

Far more subsidies go to oil than renewables.

"All's not fair when it comes to energy subsidies." New York Times Dot Earth Blog. August 2nd, 2010

“The financial consultancy, based in London, estimated that around $45 billion or so was doled out in subsidies for renewable energy sources like wind and solar power in 2009, noting how this compares to the most recent International Energy Agency estimate of global subsidies propping up fossil fuels. For 2008, the agency reported last month, such supports totaled around $557 billion — which was a big jump from the $342 billion in 2007.”

Appropriate that oil more heavily subsidized than renewables.

"Green view: How to save $300 billion." The Economist. Nov 12th 2010

“Some environmentalists try to turn this situation to their tactical advantage by comparing these figures to the much lower absolute level of subsidy given to renewables. This is a mistake in terms of logic, and quite possibly in terms of tactics, too. It is quite plausible to argue that the “size” of the subsidies in contention should be measured in terms of the amount of energy contributed. Since renewables contribute hugely less to world energy use than fossil fuels do, renewable subsidies ($57 billion in 2009) are already larger than fossil-fuel subsidies on a per-kilowatt-hour or per-tonne-of-oil-equivalent basis.”

Economics: Are subsidies effective? Efficient?

Subsidizing oil companies does not lower global prices

"Turn off the oil subsidy spigot." Center for American Progress. July 6th, 2010

“Oil subsidies don’t help consumers at the pump. […] oil companies are fond of saying that ending tax subsidies will cause disastrous price hikes. But the tax subsidies Sanders, the president’s budget, and other lawmakers propose for elimination pay companies to find and produce oil. Eliminating them will have little, if any, effect on consumer prices. A Joint Economic Committee report states, ‘the removal or modification of [one of these subsidies] is unlikely to have any effect on consumer prices for oil and gas.’ The committee found that subsidies do not affect production decisions in the near term. And in the long term the Energy Information Administration explains that the major factors affecting oil prices include the production limits set by the Organization of the Petroleum Exporting Countries and global disruptions in supply. Moreover, the minimal impact of tax subsidies on domestic production (as discussed above) underscores that eliminating tax subsidies will have little, if any, effect on oil prices.”

Hugely profitable oil companies do not need subsidies

"Oil industry barely hangs on, thanks to brave Republican defense of subsidies." February 1, 2008

“You may recall that a couple of months ago, Republicans in the Senate threatened a filibuster to defend about $13 billion in oil company subsidies. In other news, Exxon Mobil just posted the largest annual profit by a U.S. company in history — $40.6 billion. It also set a record for the largest ever quarterly profit — $11.7 billion. The second biggest U.S. oil company, Chevron, saw its profits rise 29% to $4.88 billion for the quarter. Clearly, this is an industry that desperately needs government help. Renewables are just going to have to wait until oil gets through this crisis.”

Unsubsidized oil giants need not raise prices; can lower profits.

Some supporters of subsidies argue that oil prices would increase if subsidies are eliminated. But, they needn’t. Instead, oil companies could easily absorb the lack of subsidies by decreasing their obscene profit margins.

Subsidies are just generally inefficient.

Subsidies are in essence payments by the government to keep an ineffective firm in business, or, in other words, payments for no goods produced or services provided (such as subsidies for farmers). Moreover, these payments cannot be even taken into account when calculating the total GDP (=total “welfare”) of a state.

Subsidies can reduce price incentive to conserve oil.

"The Cost of Oil Subsidies." New York Times Editorial. August 1, 2008

“Across the developing world, governments are subsidizing energy, blunting the incentive to conserve by keeping prices low. […] experts say that government subsidies are exacerbating their unquenchable thirst for oil. Keith Bradsher reported in The Times that China is expected to spend about $40 billion this year in subsidies. Venezuela and Egypt are forecast to spend more than 5 percent of their total economic output on subsidies this year. Indonesia is predicted to spend almost as much, the International Monetary Fund estimates. In all, the I.M.F. says that 48 countries are shielding consumers from high energy prices with subsidies.”

Fossil fuels critical to modern economies; subsidies justified.

"Should oil subsidies be eliminated in the US?" "No" essay on Helium

“Everything in the US Economy relies on transportation. The shoes your wearing? They were shipped on some vehicle that used gas, be it the container transport from China or the truck on the interstate from the warehouse, the cost of transportation is reflected in the cost of your shoes. The same is true of food, of computers and electronics and anything physical and tangible that is sold in stores. It affects things like the prices charged by UPS, or the Post Office or any other ship company. It, in essence, makes the economy work. All aspects of transportation, be they plane, boat, train or truck, require oil. Different types of refined oil true, but oil none the less. Subsidies provided by the US government keep oil relatively inexpensive. Though there are many who complain about the reality of $3 gas, it is a far cry for what is charged in other oil consuming nations. Imagine the US economy functioning on $7 gas such as they have in Britian. It could not be done, at least, no without the price of everything else rising to reflect this.”

Subsidizing oil helps promote economic growth.

"Why Nations Subsidize Oil: Growth." Rush Limbaugh. July 8, 2008

“The whole lesson to learn here is, when entities, bureaucratic governmental entities realize that growth is necessary, they realize that energy must be affordable and it has to be as cheap as it can be for people. The Democrat Party is the party in this country opposing that very concept. Which is why this is a gold mine year for the Republican Party. How can a party whose essential belief is that this is a nation in a state of decline and deserves to be in a state of decline, by the way, because the rest of the world justifiably hates us because they justifiably recognize we have stolen all of their resources, that we have sent our armies and our Air Force all over the world and we have killed innocent civilians, of course the rest of the world should hate us, because so many leftists hate us for the very same fallacious reasons. So we owe a debt and we need to pay a price. We need to be in a state of decline. We need to learn what our imperialism has forced other people around the world to experience and live.”

Subsidizing oil can help create and keep jobs.

Jack Gerard, President of the American Petrochemical Institute: “It’s unfortunate that the administration seems poised to stifle what remains one of America’s strongest job creating industries [by phasing out fossil fuel subsidies].”

Some oil subsidies are national security necessities.

Oil subsidies for a emergency reserve of oil supplies are a good example of a kind of subsidy that should not be eliminated. They are critical to hedging against an oil shock, in the event that there is a crisis in the Middle East or OPEC decides to dramatically cut supply.

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